Activist trading trends: Research shows a rise in the health technology sector

20 April 2017

By Adam Frederick

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Last month we released new research on a predictive analytics model that helps to forecast and recognize activist trading. The ability to apply our this algorithm, known as Activist Alarm (AA), to the stocks in our universe gives us the ability to see trends over time; our most recent analysis shows a rising trend in activist trading within the health technology sector.

To begin seeing trends we run several analyses over several periods of time, bucketing our results into sectors. The first analysis is a YTD chart, which shows a variance from the beginning of the year until now for the top 30 largest individual stock increases in AA.

To begin seeing trends we run several analyses over several periods of time, bucketing our results into sectors.

Of the top 30 largest individual increases in AA scores YTD, 32 percent are in the health technology industry, with technology and consumer services coming in next at 15 percent and 12 percent, respectively.

The second column shows that the trends continue within a more recent two-week-long period, with health technology leading the way in terms of activist interest (30 percent of our study), with finance increasing in this particular period as well.

The third column is a snapshot (April-end) that focuses on a moment in time rather than a variance from one period to the next. You’ll see that in all three graphs, health technology and general technology still dominate, with a notable recent increase for commercial services and consumer services.

Why is this happening?

We’re seeing a clear bias in the percentage of stocks that have an elevated AA score, with health technology standing out as the top sector targeted by activist investors. So why the heightened attention to the group?

While the health technology sector has basically matched the broader market’s performance YTD, all the health tech companies in this subset (with elevated AA scores) have significantly underperformed. Activists may be attracted to these smaller health tech companies, with the goal of forcing them to merge with or be bought by larger companies within the same sector — a common strategy in this space to unlock shareholder value.

The election of President Trump may also be a driving factor for this rise in activist interest. Part of Trump’s platform is the belief that market competition will force lower pricing of drugs and healthcare supplies. Lower prices would put pressure on company margins — especially on smaller cap issues or companies with a less mature product mix — which is likely to adversely affect the company’s stock price, or possibly even put the company’s future in doubt. And when this is a possibility, activists take note — they are more likely to take action and force a company to pivot when it seems like it might be in trouble.

This level of standout interest in health technology is noticeable, as it deviates from what our 10 years of research typically sees. Over the past 10 years there’s been a very modest bias of activist involvement toward finance (13 percent) and electronic technology (11 percent), but generally speaking, no sector really sticks out or is truly immune from activists’ reach.

It’s interesting to note that activists are currently heavily focused on the health technology space. Throughout our work in activist investing, it’s always useful to note long-haul trends and patterns, in addition to short-term indicators that reveal information on one sector of the market. We’ll continue to keep an eye on this space.

Find out more about our research on activist trading: download our latest whitepaper to learn more about why activists target a stock and how predictive models have come a long way in predicting activist trading.